Goldman Sachs just signaled a terrifying turning point for Nike

Goldman Sachs investment services downgraded Nike to a neutral rating.The bank cited “fundamental challenges” and an excess of inventory in its note to investors.The bad news for Nike indicates the company has not managed to turn around its business yet.

Citing “fundamental challenges” in the industry, slowing sales, and an excess of inventory with retail partners, Goldman Sachs downgraded Nike to a “neutral rating” in a note to investors.

Nike has talked openly about its recent difficulties, which saw sales decline in the mid-single digits in the last two quarters. It says that it is now working through its inventory glut, and has a new pipeline of innovations to lure in customers.

The inventory glut is causing a promotional environment for Nike, which lessens the brand’s ability to go sell at full price. A rare event last week – a Nike flash sale – seems to confirm this trend.

Nike has talked a lot about its new digital sales initiatives and direct to consumer strategy, but Goldman says the shift online is hurting Nike’s sales – at least for now.

“The pain from declining brick and mortar has outweighed the benefit of online growth,” the note reads.

Goldman also sees pressure from a resurgent Adidas, which has been taking increasing market share from Nike over the year.

Nike is also seeing softening demand overseas, according to Goldman, adding to its woes. China, previously a driver of growth in the region, is especially looking weaker. This should worry investors, Goldman says, as half of all of Nike’s revenue growth in the last decade came from overseas regions.

Still, Goldman notes that these negatives are offset somewhat by positives, like the NBA sponsorship. Goldman also says “the underpinnings of [Nike’s] business remain compelling,” and puts it in a good position to increase its share of the market going forward.